Responsibility Accounting

Control depends on the existence of an organizational framework which will define the responsibility for securing the performance of individual tasks. This is achieved by establishing responsibility centres throughout the organization, and defining the responsibilities of managers accordingly.

A responsibility centre may be defined as a segment of the organization where an individual manager is held responsible for the segment's performance.

The nature of the organizational framework and the kinds of responsibility centres established will depend partly on the size of the organization and partly on the style of management adopted.

As organizations grow, top management faces two continuing problems:

(a) how to divide activities and responsibilities

(b) how to co-ordinate sub-units.

Inevitably, authority for decision making has to be allocated to various managers, and as soon as this occurs, the result is the decentralization of the decision-making process. In essence, therefore, decentralization is the process of granting the freedom to make decisions to subordinate managers. In theory, there are two extreme states: total decentralization meaning a minimum of constraint or control on managers and a maximum of the freedom to make decisions even at the lowest level of the management hierarchy and total centralization implying the maximum of constraint or control on managers and the minimum freedom to make independent decisions. In practice, total centralization and total decentralization rarely occur. Total centralization is not feasible because it is impossible for top management to attend to all the decisions which are required to be made. Equally, total decentralization is rarely found because the degree of freedom which it implies would result in an organizational structure consisting of a collection of completely separate units all aiming at their own individual goals. The extent to which an organization will be decentralized depends upon the philosophy of its top management, and the benefits and costs associated with decentralization.

Having decided to decentralize to a greater or lesser extent, the problem of control nevertheless remains. It may be resolved by establishing new responsibility centres called 'divisions'. These divisions may take the form of profit or investment centres. We shall consider these responsibility centres later.

The problem of controlling divisional operations is more complex than that of controlling a single activity within an organization. Where decision making is centralized, for example, it is possible to establish expense centres and to control their activities by means of budgetary control. Some of these expense centres may be cost centres, which are smaller segments of activity or areas of responsibility in respect of which costs are accumulated. Control may be exercised, therefore, by means of information feedback about the level of costs arising from the activities of these responsibility centres. Indeed, cost control has been the traditional means of securing the control of operations, though as we shall see later, the failure to recognize behavioural factors affecting performance has implications for the effectiveness of cost control. Where decision making is decentralized, however, the control of divisional performance is made more difficult for a number of reasons. The range of decisions over which divisional managers have authority is much more extensive. Thus, they may have authority over the determination of the pricing of products, make or buy decisions and some investment decisions. The problem goes beyond the control of costs, therefore, to the control of profits and to ensuring that there is a high degree of goal congruence between the various divisions and the organization's top management.

Our analysis of the problem of control through responsibility accounting should recognize the problems created by the degree of centralization and decentralization of authority. The first category of responsibility centre which we shall examine, namely expense centres, are appropriate to highly centralized organizations or units. The second and third categories of responsibility centres, namely profit and investment centres, are appropriate to those organizations where the authority for decision making has been decentralized to some extent, and where the problem of control is necessarily more complex. We shall deal with the behavioural aspects of control which such a degree of decentralization creates in another page. For the time being, we shall focus attention on the accounting problems stemming from the establishment of these various types of responsibility centres.


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Read on: Organizing for Control

The integration of planning and control

We mentioned in the introduction to Part 5, that control may be related to planning by defining the purpose of control as being to ensure that the organization's activities conform with its plans. Control is itself an activity, therefore, and it should and does affect every aspect of the organization. We may depict the control cycle in the form of a generalized model.

The control cycle illustrated thereon shows that the origin of control is in the objectives of the organization from which plans are developed. These plans, as we saw in our... see: Organizing for Control